Lack of panic on Wall Street signals low not yet in sight

February 17 2003

Although war fears drove Wall Street shares to four-month lows last week, some analysts said investors might not be worried enough. That is because stock volatility, one measure of determining market bottoms, has not been extremely high, and that forebodes more declines in the weeks ahead.

The three main indices posted moderate declines for much of the week, before unexpectedly surging higher on low volume on Friday as investors made short-term bets on stocks amid concerns of war and terrorism.

But a market measure of investor anxiety, the Chicago Board Options Exchange's volatility index, or VIX, has been trading mostly in the 30s. While considered high, the level is still below the 50s reached after the main indices hit their multi-year lows in October.

Analysts say that could mean steeper losses are needed before investors can see a true market recovery, even though the indices are edging closer to their October 9 lows. The Dow is 8.5 per cent above that low, while the Nasdaq is up 17.6 per cent and S&P 500 is up 7.5 per cent.

"There's quite a bit of anxiety, but it's not at a panic level," said Richard Dickson, senior market strategist at Lowry's Research Reports in Palm Beach, Florida. ");document.write("

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"We need to see more of a sell-off," he said. "Will we test the lows? Will we go through? I don't know ... But as far as levels associated with a major market bottom similar to July and October, we need something up in the 50s."

The three main gauges fell moderately for much of the week after the release of an audiotape purportedly of Osama bin Laden expressing solidarity with Iraq. Many Americans rushed to buy duct tape and gas masks and stocked up on canned goods for fear of a chemical attack on US soil.

Still, selling on Wall Street was not that heavy and buying even emerged by week's end, after the volatility index hit a high of 40.68 on Friday. Friday's late surge helped the major indices snap a four-week losing streak.

"Investors are not as worried as in October. Part of that is because the market hasn't fallen that rapidly at once. It's fallen steadily, which tends to provoke less panic. Some people believe that means we haven't bottomed yet," said Sam Burns, an analyst for Ned Davis Research.

Ralph Acampora, director of technical research at Prudential Securities, agreed. He expects more declines, and perhaps a new multi-year low for the main gauges, unless there's an unexpected peaceful resolution with Iraq.

"Normally at market peaks, investor psychology is very serene," Mr Acampora said. When the market bottoms, "they get very nervous," he said, so the current lack of sharp market swings may be a troubling sign.

Often it is after the market sees what is known as "capitulation", a fear-driven dumping of shares by the last of investor hold-outs, that stocks see long-term growth again, he said.

Analysts stress that the volatility index is just one technical measure of a market's direction.

"There's still a lot of overvaluation, there's still a lot of debt and other long-term sentiment factors showing that investors are still bearish," Mr Burns said. "Even if the war goes away, those conditions will be there."

For the week, the Dow Jones index rose 44.57 points, or 0.6 per cent, to 7908.80. The Nasdaq had a weekly gain of 27.70 points, or 2.2 per cent, ending at 1310.17. The S&P 500 index had a weekly increase of 5.20 points, or 0.6 per cent, finishing at 834.89.